What is the Economic Problem?

The economic problem occurs when society has unlimited wants, yet limited resources available. This problem affects the economies of individuals, businesses and governments. Wants can be defined as materialistic desires of individuals or the community, which are desired because they give utility. Resources enable an economy to produce, and include the four factors of production: land, labour, capital and enterprise. These means fulfilling our desires are limited, so not all our wants can be satisfied with the limited resources available. Subsequently we must choose between them, and make choices in which our higher preference wants are given priority, and others are left unsatisfied.

Whenever we satisfy one want, we are foregoing the opportunity of another alternative want. Therefore the real cost of fulfilling our want is not the money we pay for it, but the alternate want that we give up. This cost is known as the opportunity cost, or economic/real cost, as it is sometimes referred to as. Opportunity costs can be applied to the individual, business firms and the government. The economic choices of today affect tomorrow¡¦s economic outcomes. When we choose to satisfy a want today, another want may not be fulfilled in the future.

There are different types of economies, which range between a market economy and a centrally planned economy. In a market economy, individuals and private firms make all major economic decisions. Wealth is obtained through their business activities without government intervention, and this type of system is sometimes known as free enterprise or capitalist. Characteristics of a market economy include:

„h Consumer sovereignty by the price mechanism- consumer sovereignty means that consumers will ultimately decide what goods and services will be produced by choosing which wants they wish to satisfy. Consumers wish to buy at the lowest price possible, whereas businesses want to sell at the highest price possible. The price mechanism brings supply and demand together to determine the market price for each good and service.

Private ownership of property- individuals have the right to own the means of production and acquire wealth from these resources.

Freedoms of enterprise- individuals have the right to use their resources as they choose.

Competition- this means that there is a large number of buyers and sellers, guaranteeing that no one buyer or seller is big enough to influence the market price and take advantage over others in the economy.

Under the system of a centrally planned economy, only central government planners make economic decisions, and there is a lack of individual choice to influence the economy. Public ownership of factors of production allows the government to allocate resources, however they wish. Some centrally planned economies in previous times include China and Russia, but no such economy exists today.

Australia, like many other economies, is a mixed economy. There are market forces that influence demand and supply, but also government interventions to solve and reduce the effects of various economic problems. The government provides most basic health, education and welfare services, however most decisions are left to the market. Health care is provided in the form of Medicare, and free education is offered to all from kindergarten to Year 12. The government also acts as a provider for people such as pensioners, and allocate allowances to the disabled. Examples include Family Tax Benefit and Youth Allowance. These provisions by the government ensure that people can receive more resources, reduce spending in education and health, and thus use their money elsewhere and help circulate and increase economic prosperity.

The economy does not always run freely, competitively and in the best interest of the economy as a whole. Therefore the government must avoid monopoly in the economy and enable consumers the sovereignty that is necessary. There is substantial competition in key areas such as transport, telecommunications, electricity and gas. It is a highly open economy with very low barriers to trade and investment. National competition policies are placed in order to avoid oligopoly and producer sovereignty. An example of the Australian government trying to avoid monopoly and oligopoly within the economy is allowing consumers to choose their gas, lighting and electricity providers. This action by the government ensures consumer sovereignty.

Australia has a comprehensive economic policy framework, with a sound, stable and competitive institutional structure. It also has a system of very prudential regulations. APRA (Australian Prudential Regulation Authority) is the prudential regulator of banks, insurance companies, superannuation funds, credit unions, and building societies. They are concerned with the provision of efficiency and competitiveness in the Australian economy. Economic management is affected by decisions made through The Reserve Bank, and monitoring policies regarding unemployment and interest rates. APRA is accountable to the Commonwealth Parliament as well as the regulated industries. The government also intervenes by subsidising tariffs, and provides regulations to prevent exploitation. The ACCC (Australian Competition and Consumer Commission) is the body responsible for enhancing the welfare of Australians through the promotion of competition and fair-trading as well as provisions for consumer protection. Governments can legislate to ban products, which are deemed undesirable to ensure safety standards.

The government also intervenes in distribution of output (income) because the free market may not necessarily provide a socially fair distribution. There are two ways:

1. Transfer payments- income is distributed by taxing people on higher incomes and transferring the money to people who don¡¦t contribute to the production process.
2. Progressive Income Tax- higher income earners pay proportionally more tax than low-income earners.

A market economy is subject to the fluctuations of the business cycle, therefore the government intervenes through implementation of macroeconomic (counter cyclical) policies. The Reserve Bank Australia (RBA) plays a large role in regulating the Australian economy. Its main function is monetary policy, where it tries to achieve low and stable inflation over the medium term. The RBA¡¦s aims are to stabilise the currency, maintain full employment, and to maintain economic prosperity and welfare of the people.

Australia¡¦s current government budget is in surplus with the current account deficit being largely the outcome of private sector transactions. The RBA has a powerful influence on interest rates, which affect economic activity via a number of mechanisms. They can affect savings and investment behaviour, the spending behaviour of households, the supply of credit, asset prices and the exchange rate, all of which affect the level of aggregate demand.

In conclusion the government leaves the market forces to its own will but the government will intervene and act as a provider, regulator and controller. Through policies created, the government can intervene to affect the operations of free market forces, in order to decrease the economic problem and increase economic prosperity in Australia.